A Record $220 Billion "Deposit" Injection To Kick Start To The 2013 Market

When people talk about "cash in the bank", or "money on the sidelines", the conventional wisdom reverts to an image of inert capital, used by banks to fund loans (as has been the case under fractional reserve banking since time immemorial) sitting in a bank vault or numbered account either physically or electronically, and collecting interest, well, collecting interest in the Old Normal (not the New ZIRPy one, where instead of discussing why it is not collecting interest the progressive intelligentsia would rather debate such trolling idiocies as trillion dollar coins, quadrillion euro Swiss cheeses, and quintillion yen tuna). There is one problem, however, with this conventional wisdom: it is dead wrong.

As we explained in "Dear Steve Liesman: Here Is How The US Financial System Really Works", in a day and age when i) the Fed has to step in and fill the void of deposit creation left by traditional bank lending, which has been dead for the past 4 years, via reserves, and ii) commercial banks like JP Morgan can step in and use this deposit excess (i.e., direct fungibility of excess reserves) for investment purposes, a surge in deposits means one simple thing: the banks have more dry powder to invest as they see fit.

Don't believe us? Believe the Federal Reserve of the United States instead:

[B]anks are required to maintain reserves equal to only a fraction of their deposits. Reserves in excess of this amount may be used to increase earning assets - loans and investments.

...

Deposit expansion can proceed from investments as well as loans. Suppose that the demand for loans at some Stage 1 banks is slack. These banks would then probably purchase securities. If the sellers of the securities were customers, the banks would make payment by crediting the customers' transaction accounts; deposit liabilities would rise just as if loans had been made. More likely, these banks would purchase the securities through dealers, paying for them with checks on themselves or on their reserve accounts.

We realize that this is diametrically opposite to what the general public has been indoctrinated by the Fed and its explanation of how excess reserves are used by banks, not to mention by an insolvent federal deposit insurance corporation, because imagine the panic that would ensue if people were to realize that the money they dutifully earn and save, and then deposit in a bank in a checking or savings account where it is assumed to be safe, is actually used as funding for ultra risky trades by firms like JPM's London-based Chief Investment Office (as JPM itself showed precisely happened), for example allowing a bank like JP Morgan to buy the stock or bonds of a bank like Goldman Sachs?

And after all, when one strips away all the different schools of meaningless philosophic thought, and the quasi-religious monetary dogma, in this modern age all money (and reserves), whether low-powered, high-powered, M1, M2, is really just electronic 1s and 0s in some mainframe, resulting from credit creation, either by commercial banks, or by the Fed, either under traditional or shadow bank conduits, which can be repoed, re-repoed, hypothecated, re-hypothecated at a whim, and a moment's notice.

Yes folks: this is money, it is not a philosophy textbook, and money will do whatever it is told, not what some archaic monetary school of thought allows it to do.

So when one puts all of this together, what does it mean from a fund flow perspective?

Simple: the Fed purchases assets on an unsterilized bases, as it started doing with QE3 but especially following the expiration of Twist when it is now adding $85 billion to its balance sheet on a monthly basis, the result is excess reserves, which appear on bank books as excess deposits over loans. Then commercial banks take a hint from the JPM CIO (which in turn was simply caught doing what banks have always down with excess reserves throughout history, and especially since 2008) and use the funds to buy risk assets.

Period. End of story.

Certainly the story that claims "money is on the sidelines" when talking about bank deposits: absolutely incorrect - money sitting in deposits is used by the banks to ramp the market, courtesy of the unwind of Glass-Steagall.

Which is why tracking deposit flow data is so critical, as it provides hints of major inflection points, such as when there is a massive build up of deposits via reserves (either real, from saving clients, or synthetic, via the reserve pathway) which can then be used as investments in the market.

And of all major inflection points, perhaps none is more critical than the just released data from today's H.6 statement, which showed that in the trailing 4 week period ended December 31, a record $220 billion was put into savings accounts (obviously a blatant misnomer in a time when there is no interest available on any savings). This is the biggest 4-week total amount injected into US savings accounts ever, greater than in the aftermath of Lehman, greater than during the first debt ceiling crisis, greater than any other time in US history.

So the next time someone asks you how it was possible with retail investors fleeing the market in droves (see relentless, 24 week straight outflows from domestic equity mutual funds) and putting their money in other assets, or money markets, or, alas, in the "safety" of bank accounts, that the market experienced its biggest move higher ever to start the new 2013 year, now you know.

Oh and thank Bernanke for creating $85 billion in 'deposits' each month which will be used by banks to, what else, buy stocks.

Is there anymore clear of a reason why anyone, in their right mind, after reading this and now realizing the manipulation is not only confirmed but the channel exposed, would invest in anything other than survival supplies, guns, ammo, gold and silver? I can't help but think that this absolutely has to stop but won't until the whole damn blows.

The Federal Reserve has now gone "all in" on a bet that their "put" can keep equity markets propped up long enough to allow for a real recovery with real economic growth of sufficient quality and quantity that allows them to step off the accelerator that they're using to gun the equity bubble.

So, what happens when that real recovery fails to transpire...and fails to transpire...and fails to transpire? (There can & will be no recovery since the Fed is not only pushing on a string, but has created a negative feedback loop whereby their "stimulative" monetary policy is creating aggregate demand destruction-- they can now only report positive GDP as stated due to inflation, not consumption/aggregate demand-- i.e. all current reported GDP expansion is purely nominal).

Worse yet, what happens when that recovery not only fails to transpire, but the real economy actually begins to contract again (as it already has begun to do), despite the trillions in fiat the Fed has directly or indirectly pumped into equity markets?

We are witnessing the biggest, most leveraged bet in the history of the world: The Bernanke "Virtuous Circle" bet.

(When has any fractional reserve central bank been able to forever keep a bubble inflated? They all have a historical, lifetime batting average of ZERO in this regard.)

When I see Charles Biderman appearing flummoxed in one of his presentations essentially stating that the Fed is literally propping up the equity markets, since retail investors have done nothing but flee continuously from "stocks" since 2008, I can't help but to understand his exasperation-- not exasperation that he somehow doesn't understand what'su truly happening in terms of the forces responsible for the equity market ramp job of the last 3 years, but exasperation that so few people understand the plain and unambiguous reason for this manipulated move.

What we have here is yet another intentionally blown and massive bubble, that's the direct result of Federal Reserve lunacy. The legacy of the Federal Reserve is one of inflating asset bubbles, one after the other, in the wake of the last bubbles popping, in an attempt to prolong our fractional reserve fiat economic structure that is built on pillars of sand.

The kicker is that Bernanke & Company have managed to produce one of the largest equity AND bond bubbles the world has ever seen, SIMULTANEOUSLY.

So, this isn't the dot.com bubble of the late 90s...and this isn't the housing/real estate bubble of the 2000s.

This is a MONSTER bubble that makes the dot.com and housing ones look positively diminutive by comparison, spread across so many asset classes that it dwarfs any other bubble since...well, take your best guesses, because I can't recall a bubble this large in nominal or real terms.

When this monster of all bubbles blows, game over (I'd sure love to hear some rebuttals as to how the vaporization of the nominal and absolute amount of paper wealth that will occur if I'm correct about this being a bubble ecosystem can be handled in an orderly way, that doesn't literally implode what is left of the real, actual economy, given the level of leverage now being utilized by central banks the world over).

Dammit, I have been saying I was going to do this but how do you avoid the 10% penalty ? No Dis, no first time home buyer, no systematic year over year withdrawal, no medical expense, no college ex......F the IRS,,,,,,,,what do you guys do, just eat the 10%???? I realize you still have to pay tax, but damn!

That 10% is a tough nut, indeed. I'm 62, and just completed the total distribution of my retirement plans, writing the tax payment check to the "US Treasury" a few hours ago. 35% hurts, and 45%... I'd rather not contemplate.

Personally, I found it helpful to enter into my financial/tax software, incrementally over many months, the amount of tax that would ultimately be owed. When I wrote the painfully-large checks today, I simultaneously zeroed out the liability, and my displayed net worth remained unchanged. Well, it worked for me.....

Sold my house, and banked my 14 years of responsibility (equity) that is completely unappreciated by TPTB, and plan to buy a little Gold, Silver, and ZERO equities.

I'm going to wait out this shit storm, I'm not putting money into the casino (I don't care that I'm not earning interest - FUCK YOU FED and Wall Street!), and if I go broke waiting for the rule of law and sensible government to return to Wall Street and Washington I'll milk the shit out of every government/corporate cow I can lay my hands on.

And if that doesn't work out I will DIE under a freeway overpass before I support this fucking ponzi bullshit system that has been foisted upon the average good citizen.

Thank you. This is all that needs be written on why the market is going straight up. We got a bubble in the late 90s with this crap and we are purposefully doing it again. Bernanke will be the King of creating a massive wealth divide between the speculators and everyone else.

Corrupt beyond words. It should scare someone that stocks CONTINUALLY outpace earnings. That NEVER ends well.

Agreed. This time will NOT be different. I used to say that when there is excess liquidity sloshing around that some of those funds "sneak through the cracks" and find risky places to play, even though they are supposed to just sit there until somebody wants to take a loan out. I was naive. "Sneaking through the cracks" implies that only a litle bit of that money finds it's way outdoors. I now know that those cracks are more like big mortar-blast size holes and that money POURS out and goes straight to the casino where it gets an 8-ball of coke, 3 underage hookers and a rack of chips so heavy it requires a cart.

Just that this time it could possibly happen WHILE the Fed has their foot to the monetary accelerator. Last time they had barely 2 years of rate increases before the house of cards collapsed (again) and they slammed the pedal back down (again). What happens if some semi-major financial entity falls over TOMORROW and starts the dominos dropping WHILE we are already at 0% and still main-lining $88B/mo. in QE stimulus? Or just a garden-variety recession comes along? What policy bullets are they going to shoot at it?

The only incorrect statement here is the flight of individual investors from mutual funds....yes they have fled funds but they have plowed into etf like mother fuckers. And I do not mean just bond funds...spy has had more inflows than any other time in history. I saw the stats on this the other day but I'm sorry I did not save the link. The fact is they (individuals) have only shifted their vehicles not their lust for equity.

No they haven't. The rate of outflows from mutual funds to inflows into equity ETFs is 2:1, and that's being generous. The bulk of the asset allocation continues to be out of stocks and into bonds and money markets.

Wow..."Tyler Durden says follow the dumb money." Really? Are you serious? The short sellers made their fortune in 2008 precisely BECAUSE money was flowing in at a breakneck pace. And so it is with the bulls: "they're minting money while all the rest of us are forced to redeem/load up on debt." YOU Tyler Durden(s) need to GET YOUR HEADS OUT OF THE CLOUDS. This..."esoterica" is NOT selling.

I don't see how you can compare 2013 to 2007 in any way with the fed in there as bigtime as they are. It seems to make it impossible for a PD to fail unless Spain etc. crumbles and a big bank gets caught with their pants down owning their debt.

SPDR S&P 500 ETF(SPY) brought in more new cash than any other ETF, with $16 billion in flows, most of which came in December. Due its hyper-liquidity and the ability to trade SPY at low costs, traders tend to use it to rapidly place market bets, so flows into SPY are a good barometer of market sentiment.

Not saying that they didn't plow into bonds but they plowed into stock etfs too

Assets in exchange-traded funds rose last month, with market’s largest 50 funds holding the lion’s share of the ETF market, according to data released Wednesday.

Total assets rose 2.1% to $1.32 trillion in November, pushing the market’s year-to-date total inflow to $161.1 billion, according to a report from Kevin Pleines at Birinyi Associates, a stock market research firm.

With $110.9 billion in market capitalization, the SPDR S&P 500 ETF TrustSPY+0.12% stayed as the largest fund, accounting for 8.4% of assets. The largest 50 funds account for 64.8% of all ETF assets, said Birinyi.

The Vanguard Emerging Market ETF v VWO+0.07% was third largest ETF by market cap, at $56.7 billion. The emerging-market index and 21 other Vanguard funds will shift away from MSCI indexes in January, Vanguard said in October, in a move aimed at keeping long-term expenses low.

Among the latest developments affecting the top 10 largest ETFs, the PowerShares QQQ Trust QQQ+0.05% will soon start tracking shares of Facebook Inc. FB+0.06%. Nasdaq OMX is adding the social-media company to the Nasdaq 100 index, as well as the Nasdaq 100 Equal Weighted Index and the Nasdaq Technology Sector Index. The moves will go into effect before the market opens on Dec. 12. Facebook will replace Infosys Ltd. INFY in the benchmarks.

So there's been an 8.8% (or $8.9B) gain in the NAV, and the article says SPY is now worth $110.9B.

Jan 20 - $101B
Dec 5 - $110.9B
Cap gains - $8.9B

Which means $1B in actual inflows in 11 months. To which I can only say Whoopty-friggin'-Do!!!

Here's where the story gets really, really interesting. If SPY actually had inflows of more than $1B, why isn't it reflected in their NAV?

The only possible answer is that they are skimming from their customers. Cashing out "excess" shares. I mean as long as they have adequate liquidity to replicate the index's returns, do they really have to invest the money?

All these fucking thieves are doing is waiting behind the black curtain to dump their shitload of free taxpayer money into the market when the "DEBT CEILING SQUAKING" STARTS AND THE SO CALLED MARKET drops like a bag of gold from a sinking canoe. Damn, when in the Hell is the proverbial turd going to splatter the fan in this fraudulent country!? WE NEED A FUCKING REVOLUTION!

the chinese might want out of their treasuries...keep a close eye on TIC data.

after all, if the Fed is buying $540 billion in treasuries a year (and 480 billion of Agency MBS for a round 1 trillion a year Fed purchase run rate - 45 billion per month of treasuries and 40 billion per month of MBS) and the deficit has a 1.3 trillion annual run rate we know that the government is still a net seller of around 65 billion a month (760 billion annual run rate).

someone has to buy this 760 billion, or the Fed has to step up, if the government is going to pay bankers bonuses, welfare benefits and foodstamps.

what are the odds that government spending is cut from a 3.6 trillion run rate to take up this 760 billion, or part of it?

SPartacus can remember when deficits of 600 billion were signs of the emergence of banana republic talk.

Whoever the Fed purchased the MBS from could be buying $40b/mo of the approx $65b/mo in newly issued non-monetized Treasuries. That would be similar to what John Hussman said happened in QE1:

The Destructive Implications of the Bailout - Understanding Equilibrium"The Fed can acquire $1 trillion of commercial mortgage-backed securities and other assets from banks and create an equivalent amount of “reserves” (which is essentially printing money) at the same time that the Treasury issues the $1 trillion in new Treasury securities. In this case, which is in fact exactly what has happened, the banks that previously held $1 trillion in commercial debt securities can now use their newly acquired reserves to buy the $1 trillion in newly issued Treasuries."

Its NEVER going to end. EVER. Its like a recurring nightmare, and everyday I wake up and ask, "where am I going to put my money?......besides PMs. I already have enough of that shit to make me nervious, no offence PM bulls). So, I have changed my investment philosophy a bit. I'm electing to invest in people. People I know who are doing entrepreneurial things, are short capital, but, have a decent business plan and a foreseeable probability of payback. I figure since these people are in the business of trying to help other people move from a less to a more desired state, I'd rather lose it to them than to a market I no longer understand (and maybe never really did). good luck on BTFD's. I cannot pull the trigger on that shit no more. But, I'm still gonna read ZH and the ZH'ers.

I am the thankful recipient of such an investment. One of the best relationships I have. The trust and reward is beyond anything any money changer could dream of promising me. I didn't know this guy a year ago and now he is family - I have no doubt he sees it the same way.

The market has always been manipulated and run by criminals but they at least made the effort to hide it. Now lying and stealing are official policy tools and in full view of everyone - and no one can do anything about it.

A game changer! Tyler. What a week! As Ron Paul said, we can change the mess we’re in with education - if we’re smart enough - with technology, with the Internet, i.e., with Tyler Durden and the Fight Club.

Imagine several partners own the printing press which prints dollars and these partners each in turn has a key that fits the gates to the treasury. They can print dollars or go into the treasury and pick up dollars.

What makes us think they are following some sort of pattern of ethics or fairness procedure in regard to regulation? They are operating a huge self-serve candy store; they are the owners and operators of the currency. They decide not only how much is to be in circulation, they juggle its value depending on who gets it, and, worse, they decide who gets it.

What is it that they don’t decide? Nothing!

The only difference from the banking cartel’s sordid past is it didn’t own Congress to this extent. And that’s in part what’s wrong. Nobody in government stands up against them. And, the younger generation of JPMs and GSers have become “public” thieves; they steal while you watch.

1) People who have bought up the whole market are the ones who have the money on the sidelines. Hence, there is zero dollar on the sidelines.

These institutions are called PRimary Dealers. These institutions have the both the stocks and the money on the sidelines. Again, this means that there is zero, absolutely zero, nada and zilch money on the side lines.

2) Inflows are into Vanguard index fund types from locked in pension funds. Members have no say, just the managers. This is like pensions seizure in Hungary.

Okay, net zero. But what about those corporate titans who are withdrawing hand over fist at first chance? ZH has produced for years now (all though it's been a while) lists of the sell/buy ratio of stocks and it's been as high as an obsurd 3100:1. Is the chunk they're running away with insignificant in the scheme of things?

Also, wouuldn't it suggest sucker fishing your way on the back of a whale?

The crash in 2008 started when the commercial paper market started to seize up. Investors that had bought into the crap pseudo money market shit that was AAA, good as cash and paid 5%, when bank rates were at 0%. That market seized up when clients couldn't liquidate.

Think similar situation to today. Commercial paper market could still seize up but FED is bulging with bonds, much more than in 2008. They've also managed to piss off the public. Public is already frustrated with the fucked up system. This is different than 2008. Nobody expected anything like what happened.... this time will be worse.

Maybe it will start with commercial paper again this time. Short dated IOU's from companies that are not guaranteed.... Are these things still guaranteed by the FED ? I lost track. I don't think so.

With the printing presses retaining the ability to print at will - it would seem that the only thing that could spook markets would be a rise in rates.... failed auctions. We may be closer to this than you think. There's a ton of these refi's coming in 2013... all it takes is one.

There is no down. If the Fed can do what this article suggests, we are simply pawns of an entirely rigged game. When we buy or sell paper assets, we are simply a statistical blip on a gigantic ledger of paper assets that move around via computer simulation and have nothing at all to do with actual assets.

I thought I had seen a ZH article recently showing the Fed is still substantially supporting the commerical paper market, perhaps Tyler can correct me if I am mistaken.

That would explain on top of QE why the collective financial world waits on baited breath about these Fed proclamations. Pulling down support for commercial paper would fuck up many organizations instantly, much as it threatened to do in the days in the aftermath of Lehman which we still witness to this day. That is the problem with Fed dependencies in a market in a nutshell, how do you come off the mother's teat once that market is dependent on it. Markets that did not need or were not dependent on the Fed before now would be dead without it, imagine real estate without the Fed's activities as an example and it is still bad enough.

The show will be over when they lose control on being able to keep interest rates down, when the vigilantes demand more and the Treasuries become noncompetitive in auction unless they are willing to jack the coupon or offset the paltry effective yield in some other way (reduced demand for crappy yield, lower demand lower purchase cost, higher yield). I wouldnt invest in UST for crummy yield on that basis alone and for the life of me I am glad there are others that are so spooked that money floods to UST when there is a riskoff move. Everyone needs to borrow money, the debt based society and western civilization, how soon before borrowers stop playing nice and go aggressively for funds competing on interest rates? How long? Late this year? 2014? 2015? That is when the bigger bubble wiill bust and the losers for funds begin to go belly up in larger numbers than what we have seen.

This article is evidencing that deflation is still winning over hyperinflation in the battle post Great Recession. Deposits would not surge like this if there were attractive returns in the marketplace, and where hyperinflation dollars would be chasing the same amount of goods. Since that isn't happening, deflation is still winning out and likely will for some time unless major wealth somwhow gets back into the hands of the American public, as we saw back in the 1960s or so with positive income equality. I don't expect this to happen until there's a collapse this time. Matter of when not if.

I think the whole mess is going to blow by 2015 . The whole global economy will melt down. That means we have to make stuff again. Invest in learning the skills and having some equipment and materials stashed away could boot strap a future business after the bullets stop flying. Shoes and TP?

Would be interesting to understand if deposits at a credit union or local community bank result in those deposits finding their way back into the stock market (investments). Methinks 'no' as long as the bank/CU doesn't have an investment arm (simply checking/savings/possibly IRA CD accounts).

More than any idea or article I've seen since 2008, this one has really stuck in my craw. In essence, and if true, the Fed is not only able of propping up the Treasury market but also propping up the entire stock market also through a shell game of creating money out of thin air and using it to both buy bonds and stocks through its surrogates.

Doesn't this validate the progressive premise that money is unlimited? Doesn't this negate the entire foundation of contract law and debt?

I guess we the people are just so damn stupid that we can be led to believe there is any freedom or concept of value anymore. I'm disgusted.

What this really says is that we use something called a "dollar" to represent value in our economy, and a "dollar" can be created out of thin air at the whim of the Federal Reserve. It calls into question what the value of a "dollar" really is. But then we already knew all that.

Doing away with Glass Steagal was a huge mistake at the behest of bankers claiming they could not compete. The banks were finding ways around it but that was no excuse to do away with it. Politicians for sale.

But if these savings inflows show up as "excess reserves," then doesn't this mean that they HAVE NOT been deployed elsewere (in stocks, bonds, etc.) Otherwise, they would show up somewhere else on Bank balance sheets, wouldn't they (not in central bank deposits or vault cash).

I am by no means an expert and just learning but I think the issue is fractional reserve banking.

So if you deposit 10K into a bank. Two things happen

1) The Banks deposit goes up 10K

2) The bank can now use 9K of that to buy coke, hookers, stocks or anything else it feels like.

So a rise in deposits means other asset classes rise ALSO. Thats the point of the article as I read it. You may think you are going to put your 10k in a bank account to keep it safe but all that does is give the bank even more monopoly money to risk

Who doesn't know that banks use deposits to make investments? The new part is that the Federal Reserve now buys at face value all the worthless paper the banks end up owning. Lather, rinse, repeat I think the Fed is starting to see this cycle as unsustainable. They are starting to look like Lehman Bros. writ large.

When these PD's front run the Fed by buying up T bills, are they earning much of a profit during the transaction? I realise they borrow from the Fed for free then splash out on treasuries but where does this money come from? Is it part of the 2 trillion they have in excess reserves or is it fresh money given to them by the Fed?